Why it is in Walmart's interest to keep Flipkart’s tech

Flipkart built all its tech ground up, Walmart must not piece it out and bring vendor tech onto the Flipkart platform.

Walmart is known for the best sourcing strategies in the world. Its technology was architected by Walmart's engineers and not consultants, though it outsources pieces of its tech to be tested and customised to IT service companies.

Sources in Flipkart's engineering team aver that Walmart understands that technology is what made Flipkart a large business.

Between 2010 and 2014 Flipkart's engineers built everything ground up. They built warehouse management systems, customer relationship management systems, the data analytics platform, the database and the entire ecommerce engine. Yes, it's true that it is 90 percent indigenous.

It's something Indians should feel proud of and something Walmart must respect. No wonder they have 54 million customers. So, the tech and data of customers is Flipkart's goldmine.

In its strategic documents, Walmart does not disclose what it wants to do with all this technology built without any third party vendor.

Sources in Flipkart say that as of now the engineering team will continue to run the ship as is and there is no talk of Walmart bringing in their global vendors to Flipkart. Now, Walmart’s leadership should know that the technology should remain and integrated or tweaked. It must focus on operations.

Flipkart’s subsidiaries Myntra, PhonePe and Jabong have integrated their systems with Flipkart. But they are also independent companies with their own processes. Flipkart only partnered with Microsoft Azure cloud services for analytics using AI and Machine learning last year, which was the only significant one. IBM was also trying to sell Watson to Flipkart.

Therefore, Walmart should focus entirely on streamlining operations as it infuses $2 billion of fresh equity to run the business.

The impact on Walmart

Going by Walmart's strategic presentation, here is why the global retailer should focus on operations and not the tech.

Assuming the deal closes at the end of the second quarter of this fiscal year, Walmart expects a negative impact to FY19 EPS of approximately $0.25 to $0.30, which includes incremental interest expense related to the investment. What this means is that the deal is going to negatively impact Walmart's stock for the short run thanks to the deal.

In FY20, as we look to accelerate growth in this important market, Walmart anticipates an EPS headwind in total of

around $0.60 per share, comprised of operating losses of approximately $0.40 to $0.45 per share, assuming minimal tax benefit for the losses in the near to mid-term. This amount includes about $0.05 per share related to amortisation of intangible assets and depreciation of short lived assets resulting from purchase accounting, which will only last for a few years post-closing. Then there is interest expense of approximately $0.15 per share.

• In the mid to long term, as the business scales and efficiencies are realised, we expect losses to decline and returns to

improve.

• Given Walmart’s financial strength, we anticipate the continuation of our current share buyback programme, while

maintaining our strong credit profile.

Marrying (integrating) Flipkart's technology to Walmart's tech processes is only going to derail the strategy for the global retailer’s plans for India. Walmart has to ensure its independence or it has to overhaul the whole thing by spending millions of dollars for a new one.

What Walmart can do is activate more sellers in Flipkart, rumoured to have 450,000 sellers, but only 20 percent are active. If you compare this to Amazon, sources say that Amazon has 55 percent of its sellers active on the platform. This is the challenge that Walmart must address immediately.

So for those of us, in the media, who also went after Flipkart for deep discounts and cash burn must also realise that the money was well spent on building a strong foundation.

Now you know why the founders, the funds and the employees made money. It is a story of building a product company, not just a trading engine. Before this $16 billion dollar buyout of the Indian e-commerce giant, Flipkart had raised $7.3 billion.

If you speak to its engineers they will tell you the tech is the heart of the company without which there is no Flipkart. Yes, the business outcomes achieved the valuations. But isn’t it the symbiotic relationship between tech and business that made Walmart and PEs bet on the company?

Read this space for more on Walmart's integration of Flipkart in FY19.